Is a 15-Year Mortgage
The Right Move for You?

Question: My husband and I are preparing to buy a starter home. It's a small home, and since we're planning to have a family, we anticipate that we'll need to move in four or five years. We plan to finance a $100,000 house with a 20% down payment at today's interest rates. In terms of building equity during that short time period, would it be in our best interest to take out a 15-year mortgage or a 30-year mortgage? In such a short amount of time, will we not build much equity either way?

Ali: I'm glad you're interested in building equity. Too many folks today only want to buy, wait for the market to take off, and sell for a profit. Equity buildup -- or as it's more aptly called, "equity return" -- is the oldest, surest way to increase the value of your real-estate assets. However, as you already surmise, most of the equity return in a 30-year mortgage occurs in the later years, mainly after the twentieth year.

During the first five years of a $100,000 mortgage at 7% interest amortized over 30 years, your equity return would be only about $1,868. Cutting the term in half, on the other hand, makes an enormous difference. During the first five years of a $100,000 mortgage at 7% amortized over 15 years, your equity return would be around $22,588 -- more than 10 times as much!

It's important to remember, however, that the payments on a 15-year mortgage are significantly higher, too -- $899 per month for the 15-year versus $665 per month for the 30-year, in this case. That's roughly 35% more every month.

My suggestion is that you find a 30-year loan with no prepayment penalty. Then simply pay an extra amount each month equal to what you would have paid with the 15-year loan. (Be sure to tell the lender that you want this applied to equity.) This gives you a safety valve. If you should run into unexpected financial difficulties, you can always drop down to the lower 30-year mortgage payments for a while. If you lock yourself into a 15-year mortgage, you won't have that option.

You can make your own calculations using the tools available at www.eloan.com.

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Irwin's Power Tips for Selling a Home for Less," (McGraw-Hill, 2000).

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Ali, North Adams, Mass.

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